Time-Varying Betas and Asymmetric Effect of News: Empirical Analysis of Blue Chip Stocks

We investigate whether or not a beta increases with bad news and decreases with good news, just as does volatility. Using daily returns for nine stocks in a double beta model with EGARCH specifications, we show that news asymmetrically affects the betas of individual stocks. We find that betas depend on two source of news: market shocks and idiosyncratic shocks. Some stock betas depend on both while others depend on one. We categorize each stock return as belonging to one of three beta process models, a joint, an idiosyncratic, and a market model based on the role of market shocks and idiosyncratic shocks. Our conclusions differ from those of Brown, Nelson, and Sunnier (1995) who worked with monthly aggregated data in a bivariate EGARCH model. We believe that stock price aggregation in this previous research resulted in a loss of cross sectional variation and consequently lead to weak results. If the asymmetric effect is more readily apparent in daily data, then this may again explain previous researchers' inability to detect asymmetric effects. Our findings shed light on the controversy as to whether abnormalities in stock returns result from overreaction to information or from changes in expected returns in an efficient market. Finding an asymmetric effect in betas leads us to conclude that abnormalities can, at least partially, be explained by changes in expected returns through a change in beta.

[1]  E. Fama,et al.  Value Versus Growth: The International Evidence , 1997 .

[2]  Daniel B. Nelson.  6 – Filtering and Forecasting With Misspecified Arch Models I: Getting The Right Variance With The Wrong Model* , 1996 .

[3]  Daniel B. Nelson,et al.  Good News, Bad News, Volatility, and Betas , 1995 .

[4]  S. P. Kothari,et al.  Problems in measuring portfolio performance An application to contrarian investment strategies , 1995 .

[5]  E. Fama,et al.  Size and Book-to-Market Factors in Earnings and Returns , 1995 .

[6]  A. F. Darrat,et al.  Inter-industry differences and the impact of operating and financial leverages on equity risk , 1995 .

[7]  S. P. Kothari,et al.  Another Look at the Cross-section of Expected Stock Returns , 1995 .

[8]  A. Mackinlay,et al.  Multifactor Models Do Not Explain Deviations from the CAPM , 1994 .

[9]  R. Stambaugh,et al.  Portfolio Inefficiency and the Cross-Section of Expected Returns , 1994 .

[10]  Stephen A. Ross,et al.  On the Cross-sectional Relation between Expected Returns and Betas , 1994 .

[11]  Daniel B. Nelson,et al.  ARCH MODELS a , 1994 .

[12]  L. Glosten,et al.  On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks , 1993 .

[13]  R. Engle,et al.  A Permanent and Transitory Component Model of Stock Return Volatility , 1993 .

[14]  Josef Lakonishok,et al.  Contrarian Investment, Extrapolation, and Risk , 1993 .

[15]  Narasimhan Jegadeesh,et al.  Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency , 1993 .

[16]  Narasimhan Jegadeesh.  Does Market Risk Really Explain the Size Effect? , 1992, Journal of Financial and Quantitative Analysis.

[17]  Louis K.C. Chan,et al.  Are the Reports of Beta's Death Premature? , 1992 .

[18]  Josef Lakonishok,et al.  Fundamentals and Stock Returns in Japan , 1991 .

[19]  Lilian Ng.  Tests of the CAPM with Time-Varying Covariances: A Multivariate GARCH Approach , 1991 .

[20]  Daniel B. Nelson.  CONDITIONAL HETEROSKEDASTICITY IN ASSET RETURNS: A NEW APPROACH , 1991 .

[21]  Alex Kane,et al.  Measuring Risk Aversion from Excess Returns on a Stock Index , 1991 .

[22]  Campbell R. Harvey,et al.  The Variation of Economic Risk Premiums , 1990, Journal of Political Economy.

[23]  John Y. Campbell,et al.  No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns , 1991 .

[24]  S. P. Kothari,et al.  Nonstationary expected returns: Implications for tests of market efficiency and serial correlation in returns , 1989 .

[25]  Charles E. Wasley,et al.  The relation between the return interval and betas: Implications for the size effect , 1989 .

[26]  G. Schwert,et al.  Heteroskedasticity in Stock Returns , 1989 .

[27]  Adrian Pagan,et al.  Alternative Models for Conditional Stock Volatility , 1989 .

[28]  A. Lo,et al.  When are Contrarian Profits Due to Stock Market Overreaction? , 1989 .

[29]  Richard H. Thaler,et al.  Anomalies: A Mean-Reverting Walk Down Wall Street , 1989 .

[30]  G. Schwert.  Why Does Stock Market Volatility Change Over Time? , 1988 .

[31]  M. Rothschild,et al.  Asset Pricing with a Factor Arch Covariance Structure: Empirical Estimates for Treasury Bills , 1988 .

[32]  Tim Bollerslev,et al.  Quasi-maximum likelihood estimation of dynamic models with time varying covariances , 1988 .

[33]  Laxminarayan Bhandari,et al.  Debt/Equity Ratio and Expected Common Stock Returns: Empirical Evidence , 1988 .

[34]  J. Wooldridge,et al.  A Capital Asset Pricing Model with Time-Varying Covariances , 1988, Journal of Political Economy.

[35]  Kalok Chan,et al.  On the Contrarian Investment Strategy , 1988 .

[36]  K. French,et al.  Expected stock returns and volatility , 1987 .

[37]  J. Poterba,et al.  Mean Reversion in Stock Prices: Evidence and Implications , 1987 .

[38]  R. Thaler,et al.  Further Evidence On Investor Overreaction and Stock Market Seasonality , 1987 .

[39]  Predictable behavior of security returns and tests of asset pricing models , 1987 .

[40]  W. Newey,et al.  A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelationconsistent Covariance Matrix , 1986 .

[41]  R. Thaler,et al.  Does the Stock Market Overreact , 1985 .

[42]  Ronald J. Lanstein,et al.  Persuasive evidence of market inefficiency , 1985 .

[43]  J. Poterba,et al.  The Persistence of Volatility and Stock Market Fluctuations , 1984 .

[44]  R. Pindyck.  Risk, Inflation, and the Stock Market , 1983 .

[45]  A. Christie,et al.  The stochastic behavior of common stock variances: value , 1982 .

[46]  R. Engle.  Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation , 1982 .

[47]  R. Banz,et al.  The relationship between return and market value of common stocks , 1981 .

[48]  E. Fama,et al.  Risk, Return, and Equilibrium: Empirical Tests , 1973, Journal of Political Economy.